Short Stories

Sir Philip's in a flap

King of the high street Sir Philip Green was at the World Retail Congress in Barcelona this week, and he told the FT he was a worried man. Asked about BHS' £51.4m profit loss in 2006 the Arcadia boss told the paper "we're going to have another one" (profit loss).

Enough about Sir Philip and onto the short interest. Obviously we are not able to provide this for BHS or any of the stores under Arcadia, but we can tell you about other stocks such as Sainsburys (SBRY) and DSG (DSGI), the second and third most shorted stocks in the sector (first is HMV). You can see from this eye-popping graph of DSG's short interest that a near perfect inverse correlation was made in January this year (please click to enlarge). With the slight rise in the share price since mid-March comes short covering, although this has only decreased by about 1% since earlier this week and the company now has 24% of its Market Cap on Loan (%MCOL). Utilisation, which has also decreased slightly, is just under 60% so it is now increasingly hard (and expensive) to borrow the owner of PC World and Currys. It would be logical to say that in tough times the last thing people are going to treat themselves to is a new computer. For those investors who do believe that the price rise is here to stay, there are 10 Days to Cover if you want to buy back shares.

Sainsburys is a stranger animal, as the %MCOL has gone up and down since mid-March. Two days ago Bloomberg said that its debt risk was rising amid "more signs of a global slump." At the moment the %MCOL is on the rise at 25% today, up from 17% in early April. Surprisingly, Utilisation is at 10%, and with 90% of the supply still there for the taking it is incredibly easy to borrow. Perhaps investors believe good news is in store for the supermarket chain (excuse the pun).

Over in the US, Electronics retailer Circuit City's (CC) fourth-quarter US same-store sales plunged 11.3% as customer traffic dropped even more, suggesting that it is ceding significant market share to rival Best Buy (BBY) (Lex Column). CC's %MCOL is at 17% today, up from 15% earlier this week (please see graph). The %MCOL has ebbed around these two figures since January with 9 Days to Cover. BB, on the other hand, has seen its %MCOL drop off from 11% in February to 8.5% today. There are 14 Days to Cover.

Back in Spain, you will find a Zara store on every high street, a place where the shopper can get immitation designer gear at a snitch - perfect for any shopaholic who is feeling the pinch. Zara is owned by Inditex (ITX), the brainchild of Spanish tycoon Amancio Ortega. Inditex's %MCOL is not high at 4%, down from 4.7% in late March. The share price has also risen from 33EUR to 37EUR in the same time frame. Although the clothing retailer reported its slowest profit growth in four years on March 31st, it is still growing nonetheless, and analysts have said it will resist any downturn in consumer spending (Bloomberg).

First signs of falling borrowing levels in UK Retail

The UK consumer discretionary sector has been a favourite hunting ground for stock borrowers during the past six months, during which time the percentage of market cap on loan for the UK Retail sector as a whole rose from 4.4% of the market capitalisation to 7% on Tuesday 18th March.  However, with increasing talk of risk appetite returning to the market, a significant amount of borrowed stock was returned at the end of last week.  The current percentage of market cap on loan for the sector as a whole fell to 6.82% by Friday 21st March (click the icon to see the chart).

The fall in the percentage of market cap on loan was mainly attributable to investors returning stock in: Lookers, Land of Leather Holdings, Home Retail Group, WH Smith, Sports Direct and Mothercare.  The reduction of the %MCOL in the Retail sector was in stark contrast to borrowing levels in the FTSE as a whole which rose last week (the green line on the chart).

Data Explorers Short Portfolio: Up 30% in 8 Months

Data Explorers has been monitoring the performance of a portfolio of short stocks selected by our screening tools since 7th June 2007.  The performance of this paper portfolio shows that the average return (calculated on an equally weighted basis opening price to opening price between the date when the story was published and 28th January 2008) was 29.7% per stock compared with a (short) return of 10% in the FTSE All World during the same period.

Total based on alerts since 7th June 2007	30%
Total based on news since 29th October 2007	9%
Overall Total since 7th June 2007	19%
FTSE ALL WORLD since 7th June 2007	10%

Of the thirty-eight stocks in the portfolio, only four have subsequently risen in price since the publication date, namely Yamana Gold, Hagemeyer, Calmaine and Fast Retailing.  Outstanding successes on the short side were: American Home Mortgage (delisted), Erinaceous Group (down 95% since publication), Northern Rock (down 78% since we highlighted it in a report on EMEA banks), Ambac (down 69%), Black's Leisure (down 65%), Martha Stewart (down 59%) and IKB (down 55%).  Download short_portfolio.xls

While some people may find it macabre to examine stocks which have lost so much value, we believe it is important to highlight the fact that stock borrowers (hedge funds and prop traders)came early to many of the themes which have dominated the last eight months, namely subprime, property and retail.  We would also highlight the fact that the cost of borrowing many of the stocks in our portfolio is not taken into account, and nor is the bid-offer spread. Please refer to our disclaimer concerning investment advice.

After 29th October, we began to focus more on stocks which feature in the daily news.  These stocks produced a return of 9% on average between 29th October and 28th January, while the FTSE World index produced a return of 14% in the same period.

If you would like further information about the methodology used to screen for potential short stocks, please contact Alex Hofmann (+44) 207 392 4010 or Email: ah@dataexplorers.com

Short interest in Satnav products

According to the FT, SatNav systems are set to take the honours as the breakthrough consumer electronic gift this Christmas, and as well as TomTom (TOM2), rapid volume increases in Garmin (GRMN) were more than making up for falling market prices.

Short sellers appear to have started closing their short positions in TomTom (TOM2), the European market leader, as well as in Garmin, one of its leading U.S. counterparts.

We blogged on the rising short in TomTom on October 10. At the end of September, Utilisation increased from 36% of available supply to 80% during early November, which meant the stock was very difficult to borrow and investors were anticipating a fall in share price, which occurred in early November, from 67.00EUR to 54.00EUR on November 5. Traders who closed out their positions at this time would have made a profitable trade. TomTom now has 4.13 Days to Cover, so it is fairly easy to close out positions on this stock.

Over the past week, the %Market Cap on Loan (MCOL) has decreased slightly; from 7.8% to 6.7% today, which could mean that investors believe that the surge in Christmas spending may push the price up. The price has also risen slightly, from 60.00EUR to 62.00EUR today.

Garmin have reduced the average price for its devices to $270, down nearly 20 per cent from a year ago, which may mean the product is more accessible to the already suffering US Consumer. The %MCOL has decreased from 5.5% on September 6 to 3.7% today, although at one stage in mid-November the %MCOL dropped down to 2.5%.

Utilisation for Garmin has also decreased – down from 52% on June 5 to 38% today. Utilisation has also dropped from 40% to 37% in the last few days, juxtaposed with an increase in share price, presumably for the same reason as an increase in price for TomTom. For those wishing to close out shares in Garmin, there is 3.12 Days to Cover so like TomTom it is fairly easy to return shares.

It will be interesting to see how many shorts are closed out during the run up to Christmas, as well as if the share price will increase for both companies.